The alternatives

If Britain were to pull out of the European Union, where would that leave us?

12:01AM BST 10 Jun 2002

The Nafta alternative

The North American Free Trade Agreement could offer the UK an alternative to the European Union.

The British right wing has long argued that Nafta would suit the British economy better than entry to the euro. So is the free trade area a viable option for the UK?

What is Nafta?

Nafta is a free trade agreement, signed in 1994, between Canada, the USA and Mexico. President Bush intends to expand the area over all of the Americas - into the Free Trade Area of the Americas [FTAA] by 2005.

The agreement will eliminate tariffs between the three countries by stages - freeing many goods from tariff controls by 2005. Nafta will promote fair competition, increase investment in the territories, protect and enforce intellectual property rights, while establishing a framework for further cooperation between the countries.

Under Nafta, the US, Canada, and Mexico have become a giant, integrated market of 400 million people with $11 trillion (£7 trillion) worth of goods and services annually.

How would Nafta view the UK's membership?

Support amongst the right wing in the United States, the power behind Nafta, is strong. For example, Condoleeza Rice, President Bush's foreign policy adviser, told the Telegraph in July 1999: "Were the British to come and say with a unified voice, 'We'd like to join Nafta,' I don't think there would be any objection."

Senator Phil Gramm, ranking member and former chairman of the senate banking committee, is a also keen advocate of British membership of Nafta. He is part of a Republican group, which includes Henry Kissinger, calling for closer ties with the UK. Some Democrats also support British entry to Nafta.

Is there support for Nafta membership in the UK?

Nafta is seen as an alternative to the EU in British conservative circles. Iain Duncan-Smith, the Tory party leader, supports membership, as does John Redwood, a prominent Conservative eurosceptic.

They believe that British and American democratic tradition makes them good bedfellows. Europe is a less democratic creature and European economic practices are harmful to growth. British and US economic priorities are closer, they argue. Both countries subscribe to low tax rates, a limited nation state and a flexible labour market. In Europe sacking workers is harder and tax rates are significantly higher.

Would entry benefit the UK?

Yes:

The United States is the UK's single largest trading partner and accounts for about 90 per cent of the UK's trade with North America. The United States and the UK are the world's largest providers of foreign direct investment and are also the largest recipients of foreign direct investment.

They are also each other's largest source of foreign investment. Nafta membership would increase co-operation between Britain and the huge American market. The nations have similar views on labour markets, emphasising low unemployment and high flexibility and FTAA would be a huge market for British goods.

The UK's welfare state is a notably smaller section of GDP than European states, although not as small as the US, and its tax rates are correspondingly lower than on the continent. Additionally, some economists believe that the UK's business cycles are more in line with the United States than Europe.

No:

the bulk of Britain's exports are to the eurozone, some 60 per cent. The US accounts for a smaller proportion of British trade, only 16 per cent goes to the US. Tariffs between the UK and Nafta are currently so low as to make little difference if the UK did join, and large cultural differences exist between the US and UK.

The welfare state, and the NHS, are intrinsic to the UK, but do not fit the US economic plan. And if the UK did join Nafta the EU would probably block British trade, severely damaging the UK's exports.

The Efta alternative

Trade but not government

The growing conflict between the fast and slow tracks within the European Union gives the British public an alternative to joining the euro.

Bill Cash, Conservative MP and chairman of the right-wing European Foundation, thinks that the UK should join a relaxed association of European states with economic, not political, ties. He calls this group the Associated European Area [AEA].

An Associated European Area is a possibility. A group of European nations outside the euro, called Efta, but with strong trading ties to the European Union, already exists. The UK was even once a member.

What is Efta?

The European Free Trade Association was formed in 1960 as a gateway to the European Community. Britain was an founding member, but left to join the EC.

Now the Association consists of four European nations outside the European Union. The members are Norway, Iceland, Lichenstein and Switzerland. Together they form the European Economic Area - a smaller relation of the Union with a similar emphasis on trade.

Efta nations keep their independence and work with the EU through a joint consultative committee, whose works are known as third country relations. The committee's decisions encourage trade through negotiation and consensus.

The Efta has agreed a qualified free movement of goods and people across its borders with the EU and keeps tariff barriers low enough to facilitate easy trade. These four nations command a substantial proportion of global trade.

What would the UK gain by joining Efta not the euro?

The UK's eurosceptic population would avoid the acquis communitaire - the body of EU legislation - but could still have trading links with the EU. Parts of the UK economy could also profit from closer involvement with the European Economic Area.

Consolidation between Norwegian and British oil interests might improve the North Sea oil industry, and the City of London and Swiss financial interests could work well together, perhaps competing with Frankfurt.

Why might it not work?

The biggest difficulty is that the European Union might perceive advocating a two-speed Europe as breaking up the Community. If the EU felt threatened by an AEA, it might raise tariff barriers between the two blocks.

If the UK supported an AEA, British diplomacy would have to work hard to convince the EU that Britain was still committed to European trade.